Is retail banking as we know and hate it basically finished, caput, over the hill, obsolete and dead? Perhaps not quite yet but certainly that is the implication of yesterday's announcement from the Royal Bank Scotland of Britain's first fully fledged Internet bank. Quicker, more convenient, and above all, far less costly, Internet banking is the future. According to recent research from Booz Allen & Hamilton, the management consultants, up to 16 per cent of US households will be using Internet banking by the turn of the century.
Furthermore, because these people will be drawn mainly from upper-income brackets, they could account for perhaps as much as 30 per cent of retail banking profitability. The only restraint on growth is that of PC and AppleMac ownership.
Don't get too carried away yet, however. Royal Bank's Internet facility is for the time being only for anoraks. Far from being cheaper than traditional banking, it is more expensive. Royal is planning an extra charge for those who sign up to the new service, on top of all the other charges normally associated with a personal bank account. Indeed, the only apparent advantage of Royal's Internet bank as it stands over telephone banking is that the seasoned traveller will be able to transact banking business via their lap-top for the price of a local phone call, rather than having to fork out the full long-distance charge. None the less, it is a start, and Royal Bank should perhaps be congratulated for beating the English clearers to the mark. First Bank of Scotland with Sainsbury, now Royal Bank with Internet banking - the Scots seem to be leading their larger rivals south of the border at the cutting edge of banking developments. For Internet banking to take off, however, it requires a new player to enter the market capable of reflecting the dramatically lower costs of the Internet in its charging structure. That, or for an established bank to set up a ring-fenced Internet banking operation, like Midland with its telephone banking set-up, First Direct. The difficulty of Internet banking for the traditional players is that it only adds to costs, it is yet another service they are obliged to offer customers alongside branch and telephone banking. According to Booz Allen, the average cost per banking transaction through the branch network is 60p. With telephone banking it is 35p. The cost through traditional computer banking is 17p. And then there's the Internet - just 8p. The cost-to-income ratio of the best of the high street banks is around 50 per cent. With a pure Internet bank it could be as low as 15 per cent. Unencumbered by the high-cost branch network and infrastructure of the traditional banks, the pure Internet bank can undercut with abandon. Nor are the extraordinary cost advantages of Internet banking the only thing the traditional high street banks have to fear. In theory, Internet banking allows services presently bolted together under one roof to be unbundled, allowing the customer to become promiscuous with his business. It might be possible, for instance, to chase the best deposit and borrowing rates automatically. Banks would lose their proprietary grip on their customer base. Instead the financial profile of customers would become the property of middle-men and software providers, with the result that banks would have to compete genuinely for business and custom. Retail banking would become much more like wholesale banking. What Royal Bank of Scotland is doing, then, is opening Pandora's Box. Provided Internet banking can be adequately regulated and controlled, provided it can be made as secure as its exponents claim, it promises to usher in a much more competitive age in retail banking. …